N.C. Considers Three Tax Proposals

North Carolina lawmakers and Governor Pat McCrory are considering three different bills to overhaul the state's tax system. Republican leaders in the Senate introduced the latest and most ambitious one Thursday. There's also a bipartisan Senate plan and a Republican House plan.

Need For Change

Proponents say the changes are necessary for a few reasons. For one, North Carolina's current tax code has been around since the Great Depression. Obviously there have been tweaks here and there. But many lawmakers and the governor agree it needs a comprehensive update.

Also, proponents argue lowering tax rates would make North Carolina more attractive to businesses, which could lead to job growth. We currently have the highest income tax rates in the Southeast, according to the non-partisan Tax Foundation.

Lower Income Tax Rates

The bills would change those things in a few ways. They would all lower income tax rates and make them flat, meaning everyone pays the same rate. As of now, there's a range of personal income tax rates, from six percent to 7.75 percent.

The House plan and the bipartisan Senate one are similar in this regard – they'd both cut the rate to about 5.9 percent. The Republican Senate bill introduced yesterday would go further, cutting the rate to 4.5 percent over time. All three would cut corporate income tax rates, too, as well as the sales tax rate.

Sales Tax Expands

But the change in sales tax rate is a little tricky. The rate goes down, but it would be applied more broadly. In other words, we'd be paying it on far more services. That's partly to make up lost revenue from the other cuts.

The sales tax rate goes down slightly under all three plans. The big difference is how many services it would expand to. In the House and bipartisan Senate plans, the sales tax would expand to cover things like car repairs, property maintenance, and concert and movie tickets.

The Republican Senate plan goes further again. It would expand North Carolina's sales tax base to one of the broadest in the country. It would include taxes on food, prescription drugs, and social security checks for some seniors. And it would eliminate the state mortgage interest deduction.

Opposition And Bottom Line

Some realtors, doctors and the AARP have come out in opposition to those changes. The Republican Senate plan has created the most controversy of the three and may have the hardest time passing. Governor McCrory says he likes the other two better.

How much more or less you'd pay in taxes really depends on how much you make. Everyone will be paying less in income taxes, but many people will pay more in sales taxes. If you have a lot of income, the reduced rate will easily outweigh the increase in sales taxes, so you'll pay less overall. But sales taxes disproportionately affect people who don't have a lot of income – so some low-income families could see their taxes go up.

Of course, these proposals could change. All three are still in committee.

Governor Pat McCrory and state lawmakers are considering major changes to North Carolina's tax structure. So we decided to take a closer look at a report released Wednesday detailing the effective tax rates currently in place. It's from the liberal-leaning Institute on Taxation and Economic Policy in Washington, D.C.